2015-04-14

As you may know, an Alberta election is underway. Will godless socialists form government and/or opposition? Will Jim Prentice be the PC leader who finally breaks that hallowed "PCs look in trouble at the time of the election call and then handily win a majority" streak? Will voters remember their distaste of Danielle Smith/Alison Redford/Raj Sherman in the ballot box?

Recently on Twitter, PC MLA† Kyle Fawcett made a surprise announcement. Under Jim Prentice, he announced, the PC party would "break the boom and bust cycle once and for all".

This is extraordinary! Apparently, Fawecett and by extension Prentice either don't know how economics works, or they have an unabashed evil plan to ruin Alberta by ensuring it never has economic or financial successes ever again. For those who are confused, let's just summarize by saying that the Alberta government strictly speaking doesn't have the power to "break the boom and bust cycle"; and any such power they do have is unlikely to result in the sort of paradise that would inspire voters to support their party.

† Calm down, constitutional nitpickers.

Breaking the "boom and bust cycle", you see, involves two operations: breaking the boom, and breaking the bust.

Let's start with the first option: breaking the boom. That's really really easy to do, and good news for Prentice and Fawecett: governments, especially led by "progressives", are very very very good at breaking booms. Killing economic growth was easily achieved by President Monkey in 2012, Vladamir Putin in 2014, and Venezuela made their bust so much worse that now in retrospect it looks like a boom. And those are just examples from the 2010s decade. We can, of course, go back as far as you like for finding examples. The reason for this is there are many levers at the government's disposal for ruining good times. From John Marthinsen's book "Managing in a Global Economy: Demystifying International Macroeconomics":

There are six primary ways by which governments can impede economic growth. First, to fund their expenditures, governments must either borrow or tax. If borrowing rates raise the real interest rate, it can crowd out private investment (and also consumption) expenditures. Taxes lower profits (and/or disposable incomes), which also reduces investment (and/or consumption). This reduction in private spending can also lower economic growth.
Taxes may also diminish work incentives by lowering the opportunity cost of leisure. For example, someone who works eight hours a day, earns $20 an hour, and pays a 10% tax rate sacrifices $144 for each day off. If taxes were raised to 40%, the same day off would cost the worker only $96. Therefore, higher taxes make leisure cheaper.
Third, at some point, government spending begins to encounter diminishing returns, but this is no surprise. Why should governments be any different from private companies? The marginal returns on government projects, such as educational programs, roads, tunnels, and bridges, follow the same inevitable pattern of diminishing returns as private investment in buildings, factories, machinery, and tools. As more projects are undertaken, the return on government projects, as some point, is bound to sink below the return on private projects.
Fourth, governments are accountable to voters and constituents, but they are not accountable to bottom lines or shareholders. As a result, they are more likely to spend too much and unwisely. Government accountability is also diminished because there is often no way to measure the economic return on nonprofit government projects.
Another way governments can impede growth is by focusing more on the redistribution of assets and annual production than they do on increasing growth, wealth, and national equity. Often, issues of fairness and creating a level playing field become major considerations in many government debates, when increasing the size of the economic pie should be the focus.
Even though income redistribution and economic growth do not have to be at odds with each other, they often are. Similarly, there seems to be an inverse relationship between the extent of government regulations and the rate of economic growth. Therefore, balance and care are needed when changing or imposing rules, guidelines, and procedures.
Finally, markets of the remarkable power to increase a nation's wealth and well-being. This is not to say that markets are always right, but as Winston Churchill said about democracy, they are better than the alternatives. For this reason, governments that interfere with the national and international flow of financial capital, labor, goods, and services can cause more harm than good to their domestic economies.

As you can see, it's easy for Fawcett and Prentice to impede growth and end "booms". All they have to do is borrow a shit-ton of money (done), raise taxes (done, though some idiots want them to go even further), spend money in accordance to what the noisiest voters want and ignore the lack of returns (done), act based on backwards notions of "fairness" instead of improving the lot for everybody by inefficiently redistributing wealth (done), increase the size and scope of government regulations (done), and introduce protectionist policies to interfere with labour/capital/trade flow (to be fair to Prentice, so far he's done nothing of the sort -- that's Rachel Notley's wheelhouse).

So now that Fawcett and Prentice are doing their best to impede and destroy economic growth and prosperity in Alberta, we have to look at the other half of their equation. Can governments end busts? John Maynard Keynes thought so, and the way he thought they could do it was to....run deficits by borrowing and spending. Hey, notice that these are the things that make a boom less boomy. Do they also make a bust less busty? They don't, of course. Part of the problem is that (4) in the list of reasons the government can kill economic growth: Keynesian economics demands that governments vastly reduce spending during times of economic growth in order to dampen such growth and raise capital they need to spend during the next bust cycle. Neo-Keynesians like Fawcett and Notley are never so vocal about that part of the plan. Imagine the Prentice PCs announcing that if Alberta's economic growth exceeds 4% in any upcoming year, they will fire 50,000 teachers and nurses. Do you think this is likely to be popular? Keynesian economics as a political option is poison and won't ever be applied. This is one of the problems with this "we'll remove the boom and the bust" claims.

Remember the old days, what was called the British problem: stop go, boom bust, unstable cycles…Britain the country usually first in, worst hit and last out of any world downturn; invariably hit by an inflation problem that prevented interest rates falling when they needed to come down; and usually then by wage inflation that could not be afforded and prevented you making long term investment.

So I want to explain to you today the policy we - and the Bank of England - will continue to pursue to ensure the British economy entrenches our new won and hard won stability and continues to grow – ensuring we take no risks with inflation or stability generally, or with the fiscal position."

Why? Why can't Brown and Fawcett stop the boom and bust cycles? Too much Keynes? Not enough Keynes? Fiscalism vs monetarism. That is not the problem.This is:Change.Read it through again and you'll get it.The economy of Alberta (or any economy really) is a rapidly changing place. There is, frankly, so much of it, every bit of which is continually on the move, constantly changing.

This is the Rachel Notley nightmare, as it were. For a scrupulous and conscientious government fiscal manager diligently striving to keep this massively detailed and complex economic tome abreast of all the changing circumstances and conditions that the market (read: the people of Alberta doing things) throws up every minute of every hour of every day, it would be a nightmare. The ultimate problem with central planning remember is the sheer complexity of the calculations to "run" it properly. A computer could, eventually, but not a person. And even if we develop the global processing power to operate Alberta's economy, it ultimately would have to be run on formulae and heuristics which means that cold hard math would be making the decisions. Centrally planned economies aren't "humanist" and "compassionate", they're the precise opposite.

None of this solves the Fawcett Change Problem, of course. His goal of "no booms and busts" is literally impossible, because change happens. This situation arose at a job I had a few years ago: we were manufacturing products for a couple of different large customers, who we were convinced were secretly colluding to make our lives miserable: they would request changes be made to the product seemingly in tandem but almost always precisely opposite. "Bigger handles" from one, "less bulky handles" from another, so on and so forth. Then, presumably just to get us, they would decide that they in fact didn't like their change but instead liked the change the other customer had requested. That was occasionally in tandem too. It gave everybody who was in charge fits. I wasn't in charge, I didn't get fits. In one exasperated moment in front of a lot of people, a manager actually demanded that the sales rep tell him when we could get a "final design" and not make any more changes. That manager didn't last much longer. The quick answer to when the "final design" of a product is achieved is the last product. The long answer is that market forces dictate change: customers want newer, better, improved. Nobody thinks that the 1973 computer should still be manufactured in a plant somewhere. Somewhere along the lines, the local area where 1973 computers were built entered a "bust" cycle. People didn't want 1973 computers anymore. As the bust came about, either quickly or slowly the economy had to change to adapt to the new conditions. In time, they learned to build 1976 computers or 1978 disco balls or whatever it took to get back to sales. Once sales were jumping, it was a "boom" until disco died or the 1979 computer took over or what have you. Change is a part of industry, it's a part of market forces, it's a part of the world we live in. Ultimately the Kyle Fawcett plan of "no boom and bust cycles" means a lack of innovation, change, and improvement.

Technically, a bunch of factories and oil refineries and cupcake stores and Walmarts and restaurants closing down and nothing new springing into their place is a "no boom and bust" cycle. Is that the Alberta we want? Death and decay? All busts, no booms? Because that's the only possible circumstance. All booms and no busts isn't possible, it implies that everybody will keep expanding in a way precisely aligning with the way we're doing things today and the near future. No manufacturing will go to China. No non-Alberta sources of oil will dry up or become politically unavailable. The things we're doing in the next few months are what the world wants the most in the few months after that. No, busts are unfortunately a part of life, as Gordon Brown already learned. It isn't just a "resource-based" economy, either. The Norwailers like to claim that booms and busts are a consequence of natural resources being used as a primary driver of the Alberta economy. Notice that this graph of GDP per capita of various south-central African nations, while it certainly has an overriding trend important to the author of the graph, also features mini "boom" and "bust" cycles. So does this graph of France, or Mongolia, or Uruguay or Nova Scotia.

Booms and busts are a natural part of having an economy. If you don't like boom-bust cycles, then you don't like having an economy. In which case, kindly slit your throat. No, I'm serious, that's your way to escape having an economy. Mad Max seems an improvement now, doesn't it?

You know what else is an improvement? Getting rid of neo-Keynsian fools like Kyle Fawcett and Jim Prentice. On May 5 2015, you can vote out their incompetent government and replace it with a market-oriented and sensible Wildrose alternative. Wildrose, or the economic equivalent of slitting your own throat. It's your choice. May 5.